Why the Big 3 Are In Trouble
Nathaniel Snow sums it up brilliantly:
The big 3 have been on the verge of failure for quite some time. They’ve been flirting with the edge of profitability thanks to competition from imports (which I think is a good thing) but labor costs have held them back. As a result they have become capital-heavy. If you can’t hire labor cheap, you will invest in capital. The labor which remains is paid higher wages, but there are fewer workers. It is the less-productive worker who has goten the fuzzy end of the lollipop because they are out of a job (this is what unions do - they protect the most productive workers from cheap competition by erecting a barrier to entry). In the meantime, higher taxes have encouraged the big 3 to take their profits in something other than cash - viz. concessions to workers, higher pay to CEOs, and more benefits for workers (which goes untaxed).
Workers, meantime have taken more of their wages in futures contracts - pensions. But these pensions have a tendency (just like medicaid and social security) to be underfunded, based on poor estimates of future costs. Now, the big 3 have huge obligations to pensions and benefits which are expanding their costs, preventing them from competing against imports, and hurting their profits. In short, they are sunk.
Unions pushed for these benefits, etc. to their own detriment, because long run considerations were not thought of.
Like the elevator-operators unions which raised the wages of elevator operators until it was more worthwhile to install automatic elevators, these guys have bargained their way out of a job.
Nathaniel Snow sums it up brilliantly:
4 comments:
Now, if I only had the time to do web-searches for all the nice pictures you attach to re-posts of my stuff!
Thanks for reading!
Lunch after finals?
Ah, the old blame the unions argument.
One fact overlooked: Japanese and European manufacturers, considered the model of how to do car companies right, do not have to wrestle with such high health care costs because their govt provides healthcare to their employees and indeed, to all of their their citizens. Govt also provides more comprehensive retirement benefits. So the imperative for unions does not exist in these countries nearly as much as here. Plus, these companies are taxed at an even higher rate, and they apparently function fine.
If one is going to want to emulate the Japanese companies, then one should argue for universal health care to relieve the burden on the auto companies.
In actuality, the auto unions have made major concessions in recent years, yet the industry still suffers. They suffer because of poor, overpaid leadership which ignored the imperative to invest in more fuel efficient technologies, etc. Their problem was chasing short term profits...in other words, pure greed.
As for CEO compensation, even in non-union industries we've seen a huge money grab by the executives. It's rather tenuous to link that to the unions or higher taxes.
What's needed is greater accountability for these overpaid execs, and a cap on salaries for accepting govt aid.
What's a shame is that for years the auto makers fought tooth and nail higher CAFE standards, and the like.
It's good that workers are given fair wages and benefits...as we've seen, when the middle class prosper you get robust industries, because only then can people afford to buy products.
The middle class has been hollowed out these last 8 years, but didn't notice it so much as long as they could borrow against the ever rising equity in their homes.
Now the sad truth is revealed, and it's hardly the unions' fault.
Here's what we have to do if we want to emulate the success of the Japanese auto manufacturers:
1) Institute universal health care and end this burden for the companies.
2) Beef up Social Security or start another govt pension program so that this eases the need for the companies to provide good pensions.
3) Have government subsidize large amounts of research and development for the auto manufacturers. Jim Press, former president of Toyota’s U.S. division, said "The Japanese government paid for 100 percent of the development of the battery and hybrid system that went into the Toyota Prius."
4) Have govt enact trade barriers that give domestic manufacturers a price advantage.
5) Have more respect for the importance to a country of having a healthy manufacturing base.
Now, admittedly, the Japanese auto manufacturers have just figured out how to do some things better, such as better purchasing systems, leaner production methods, etc. But it's also true that they give wages and health packages to their workers in North America similar to those provided by their U.S. rivals, and so it's not like the employees of the US car companies are so overpaid.
It's also doubtful the Japanese companies would be where they are without a good dose of govt support through the last few decades.
That in no way mitigates the responsibility of US auto vendors to make better and more fuel efficient cars, and not rely so much on sales of large SUV's...but it does show that the picture is more complex than some make it out to be.
Exactly what part of the Japanese economy do you want us to emulate and how much of the American economy are you willing to destroy? The Japanese economy had a horrible growth rate throughout most of the 90s, in part for following the policy recommendations you're making. They keep using their resources to prop up failing industries rather than allocating their capital and labor to profitable enterprises. This is a recipe for disaster.
Item by item:
1) Do you want public healthcare to have the quality of public education or public housing?
2) Social security is already set to go bankrupt if major changes aren't made to the system. Ramping it up will make the economic situation far worse, not better.
3) The internal combustion engine was the technology that served American economy well in the mid-20th century. It is the technology of the past and not the future. The government can subsidize technology all it wants, but if consumers don't adopt it, it will fail. As such, this is a job for the market not the government. If you want to use government funds to subsidize something to unleash the best innovation, subsidize a goal (such as technology leading to a greater MPG) rather than the specific way to get there (such as hydrogen fuel cells). Reward successful innovation rather than picking the winners (or winning technology) ahead of time.
4) Trade barriers are one of the best ways around to make to make a nation poorer. If that's not true, let's start erecting trade barriers between the states to make all of us better off. No more Florida oranges in Virginia and no more cars made in Detroit sold in California. Think of all the orange growing jobs we'd suddenly have in Virginia and all the auto companies that would start up in California. And why stop there? Why not make barriers between counties within the state as well? If trade barriers are good, this logic applies. If they are bad, then they are bad between countries as well. Mutual trade makes both parties better off. Why would we want to simultaneously hurt ourselves and our trading partners by creating trade barriers?
5) Should we have had a better respect for agricultural jobs in the early 20th century? Would we be better off if the government had had programs to ensure 60% of the workforce had stayed in agriculture? What is so special about manufacturing that means it can't get more efficient with labor the same way agriculture did?
BTW, Detroit is uncompetitive now precisely because the government raised trade barriers against Japanese automobiles in the past. This allowed the Big Three to maintain inefficient practices which grew worse over time. Had they not been shielded from foreign competition in the past, they would have likely been in better shape today and American consumers would have been far better off with cheaper, higher-quality cars. Japanese cars became renowned for quality after the US government put price restrictions on how low they could sell their cars. (Keeping prices artificially high.) Since they couldn't compete on price, they switched to compete on quality. Using government to keep prices artificially high (like through trade barriers) means Americans have to pay higher prices, making them poorer in order to make big companies richer and lazier. That describes the history of Detroit perfectly. With Obama coming into the presidency, I hope we have genuine change instead of copying flawed strategies out of playbooks from the past.
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